(Appeared on the RealEstateWeb website on 5 July 2011)
Investment clubs are the answer.
Ongoing press coverage about the difficulties encountered by today's property investors has recently highlighted a number of issues - but there is a general agreement that the lack of bond finance/capital has been the defining factor in the drawback by so many who previously regarded property as their prime investment channel.
The "obvious" solution to the present difficulties is to form an investment club - with anything from three to ten members.
The legal/tax position of an investment club puts it in a particularly favourable position right now with banks and other lenders. Since the Companies Act 71 of 2008 came into effect from 1 May 2011, such clubs can use a legal entity such as a private company (Pty Ltd) to hold the property and setting up such entities is simple and inexpensive.
The private company is also not required to have a statutory audit until certain fairly high turnovers are reached.
Forming an investment club in the form of a private company makes it far easier to obtain bank finance. This is because the National Credit Act does not apply to juristic persons with assets or turnover over R1 million, only to those buying in their own name. The bank is, therefore, able to take a bigger risk and advance larger outlays to such entities without incurring a penalty for reckless lending. Furthermore, in its income and bond serviceability assessment calculations, the bank can take into account the combined income of all the club members, another huge advantage.
There will always be some people who dislike investing with others and that find sharing income or profits with others goes against the grain. However, as successful clubs almost always end up owning a total portfolio of properties, the returns are likely to grow year by year - and if a competent lawyer is employed at the outset to draft the shareholders agreement, it is possible to avoid the vast majority of contentious issues which can crop up if the agreement is not clearly worked out at the start.
I believe it is better to own a small percentage of something than a large percentage of nothing.
When I talk to people about the advantages of property investment, I am often told that they like the concept, but they lack the cash or the ability to qualify for bond finance. Property investment clubs allow those with an interest in this field to get a foot on the property owning ladder for minimal initial outlays - and it is worth noting that many of the wealthiest property investors of our time have testified that they made their money initially on borrowed cash and with financial partners, banks and others.